INSTANT ASSET WRITE-OFF EXPLAINED

SMALL BUSINESS OWNERS

With anything to do with finance you should never assume to know something without getting expert advice because once you’ve made a decision or commitment there is no turning back, and the actions or decisions you make today could have tax or borrowing implications tomorrow.

In this newsletter I will be covering off depreciation and the instant asset write-off because I think this is one of those things we assume to know about, but don’t necessarily get it right.

There are so many rules, regulations and policies to keep up with across all the different financial sectors, that having good people on your ‘team’ is critical for making the best decisions not only for your business but for any personal financial goals you want to achieve such as buying a house.

What is a depreciation expense?

Before I write about the instant asset write-off, I wanted to clarify what a depreciation expense is.  In simple terms, it is the reduction of the recorded cost of the asset over the useful life expectancy.  That is, the length of time the business expects the asset to be productive.  This reduction, or depreciation expense, is reported on the profit and loss statement under expenditure and is taken off the gross profit thereby reducing the net profit which is ultimately the amount you pay tax on.

As depreciation is treated as a non-cash expense, some lenders allow you to ‘add back’ the depreciation amount which in turn could then increase your borrowing capacity.

What is the instant asset write-off

Unlike a normal depreciation expense whereby you write-off the depreciation expense over a set period of time, the instant asset write-off allows you to claim the full deduction for the business portion of each asset either in that financial year purchased or when it is installed ready for use.  Head to https://www.ato.gov.au/Tax-professionals/Newsroom/Your-practice/Instant-asset-write-off-increased-and-extended/ to read the eligibility criteria for the instant asset write-off.

Instant asset write-off thresholds

It is important to highlight that there are limitations with the instant asset write-off, and this is around the cost of each asset.  Below shows the instant asset write-off thresholds for the 2018/2019 tax year.

  • 7.30pm (AEDT) 02/04/2019 to 30/06/2020 = $30,000 threshold for each asset
  • 29/01/2019 to before 7.30pm (AEDT) 02/04/219 = $25,000 threshold for each asset
  • 7.30pm (AEST) 12/05/2015 to 28/01/2019 = $20,000 threshold for each asset

If the cost of the asset you purchase exceeds any of the above-mentioned thresholds you will not be eligible for the instant asset write-off and instead will have to depreciate it over the useful life expectancy.  Head to https://www.ato.gov.au/business/depreciation-and-capital-expenses-and-allowances/in-detail/depreciating-assets/simplified-depreciation—rules-and-calculations/?page=4 to see examples on different asset purchases.

If you’re still unsure exactly how this works or how it will impact your tax return at the end of the financial year, be sure to get in touch with your Accountant.

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